The conventional ‘trilemma’ view is that countries that allow free capital flows can still pursue independent monetary policies as long as they allow flexible exchange rates. This column examines the pass-through of Federal Reserve interest rates to policy rates in Chile, Colombia, and Mexico. The author concludes that, to the extent that central banks take into account other central banks’ policies, there will be ‘policy contagion’ and that, even under flexible rates, monetary policy will not be fully independent.

Trade liberalisations are often accompanied by labour market reforms, making it difficult to isolate their effects. This column discusses the effects of trade liberalisation, globalisation, and labour-market reforms on the Colombian labour market. Reduced trade frictions increased cross-firm wage inequality and shifted the firm-size distribution rightward, with offsetting effects on overall wage inequality. Average income increased, but the gains were concentrated among employees of large, productive firms with access to export markets. Greater trade openness also increased job turnover.

Latin American central banks are facing new challenges in the form of unprecedented levels of uncertainty and exchange rate appreciation pressures. This column, focusing on Brazil, Chile, Colombia, Peru and Mexico, argues that there is an overestimation of the potential output in several Latin American economies, a lack of an explicit policy direction from central banks, and lacklustre frameworks for macroprudential policy. Although inflation targeting has served countries in Latin America well, significant risks remain.